Shapiro – September 2024 Market Insights

September 12, 2024

CONSUMER BUYING PRICES

Henny Penny is a story from a 200-year-old British fairy tale. In the American version, she is called Chicken Little. One day Henny Penny is pecking corn in the farmyard when – WHACK! an acorn falls on her head. She believes that disaster is imminent. Does listening to political ads and reading the news make you feel like the sky is falling?

As the story goes on, Henny Penny sets off to tell the king that the sky is falling and along the way meets other animals who believed what she said and they blindly followed her. The story of Henny Penny/Chicken Little has many endings, but in the most well-known version, a fox invites the animals to his den and eats them all. The moral of the story: Don’t believe everything you hear, and check the weather forecast to see if the sky is, in fact, about to fall.

It’s not unusual to hear Americans complain about the economy and inflation. While I understand their frustration, here are some additional facts to consider.

• The economy grew 3% in Q2 after growing 1.4% in Q1.
• Inflation has been moving downward and has been 2.5% using the Fed’s preferred measure PCE, personal consumption expenditures. Over the last 3 months, it has been 1.7% on an annual basis excluding food and energy.
• Personal income rose 0.3% in July and is up 4.5% annually. After taxes and inflation, incomes were still up 0.1%. Meanwhile, July consumption spending rose 0.5%, or 0.4% after inflation.
• Employment levels remain strong among prime-age workers, or those ages 25-54. 80.9% of that population is employed, matching the largest share since 2001. The unemployment rate dropped 4.2%.
• The job market for August was reported on Friday with 142,000 jobs added. Job gains over the past three months averaged 116,000 per month. This is down from the first three months of 2024, when the economy added 269,000 jobs on average per month. Job openings keep falling, which signals a potential downturn in the economy.

These facts should help you see that the sky is not falling and what is really happening in the economy. Despite this, people still feel they are worse off today than they were 4 years ago. That is the definition of “vibesession.” And yet, even though everyone complains about inflation and the price of food, spending keeps rising. Go figure.

Job growth is slowing. It is an important factor in determining what the Fed will do about lowering interest rates and keeping the economy growing. The Fed still worries about inflation and acts very conservatively. The question is, will they cut interest rates by 0.25% or 0.50% after their September 18 meeting. Economists are forecasting 3 rate cuts this year and more next year if the economy slows and unemployment rates go up.

Typically, it takes a long time for interest rate changes to affect the economy. Most recently, it took over 2 years for the rate hikes to bring down inflation. Lower interest rates will reduce the costs of buying cars, houses and other purchases, along with credit card debt. The lower rates will also increase business investments. Just remember, it’s not going to happen fast.

INFLATION

Inflation keeps falling

• The Consumer Price Index (CPI) for August dropped from 2.9% to 2.5%. This was in line with expectations and also the lowest inflation in 3 years.
• Core inflation for August, which excludes food and energy costs, increased 0.3% from July, the most in four months, and 3.2% from a year ago. The three-month annualized rate advanced 2.1%, picking up from 1.6% in July. This information will likely keep the Fed’s interest rate cut to 0.25%.
• Personal Consumption Expenditures, PCE, the Fed’s preferred inflation measure, rose 0.2% in July and are up 2.5% in the past year compared to a 3.3% gain in the year ending in July 2023.  “Core” prices, which exclude the ever-volatile food and energy categories, also rose 0.2% in July and are up 2.6% versus a year ago, a big improvement from the 4.2% reading for the twelve months ending July 2023.  Core price inflation has now stalled for three months at 2.6% on a year-ago basis. Personal income rose 0.3% in July and is up 4.5% in the past year.
• The Producer Price Index for August will be out today and not much change is expected. July was flat.

MANUFACTURING

Flashing yellow lights

The Manufacturing PMI® [ISM] rose 0.4% in August to 47.2%. The overall economy continued in expansion for its 52nd straight month. A Manufacturing PMI® above 42.5%, over a period of time, generally indicates an expansion of the overall economy. New orders, backlogs, production and employment all remained in contraction. Only the backlog of orders and employment indices rose slightly in August while the rest fell. However, the trend remains steadily down.

• ITR is forecasting a 10% increase in aircraft production from 2024 through 2026 and forecasting industrial production to increase 2% in 2025 and 2026. ITR is a highly accurate economic forecasting company that uses a 12-month moving total or average.
• U.S. non-defense capital goods new orders, excluding aircraft and transportation declined 0.2% in July. They were also revised lower for the prior months and are up only a modest 0.6% in the last year, failing to keep pace with inflation.
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, fell 0.4% in July and, if unchanged in August and September, would decline at a 2.4% annualized rate in Q3 versus the Q2 average. This is the third consecutive month that core shipments have declined, and the fifth time in 6 months.
• New home sales fell in August by 8.7%. Existing home sales were up slightly. The 30-year mortgage rates were up in August between 6.6% and 7%.
• Car and light truck sales fell slightly in August. ITR is forecasting next year’s sales to be about the same as this year and 2026 to be up 3.6%.
• The NFIB, National Federation of Independent Business, reports that small-business confidence rose slightly again.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our ten locations and a diverse industrial base. August purchases were down 3% based on our twelve-month trailing average.

CHINA

No change in the malaise

China’s issues continue.

• A real estate collapse with no solution or strategy in place.
• An aging and shrinking population along with a decreasing birth rate.
• Youth unemployment is so high the government refuses to report it.
• The Covid Zero policy disaster.
• Bloated government debt.

Is it any wonder that Chinese consumers, already prone to saving heavily, have become even more frugal. And their government is forecasting 5% growth in GDP this year? Really?

Martin Whyte and Scott Rozelle, two brilliant Harvard/Stanford professors in sociology and economics, have been studying China for decades. In 2004, as China’s economy was emerging as a global force, they conducted a nationwide survey asking Chinese people if they were better off financially than they were five years earlier. The percentage of people who felt wealthier climbed when surveyed five years later and again in 2014, when it reached a high of 77%. Last year, when respondents were asked the same question, that figure dropped to 39%.

China is not the U.S. and in general the people of China will tolerate a lot more pain than Americans. It will take a very long time to resolve their economic issues.

China is the world’s second largest economy, and its GDP is two thirds the size of the U.S. It consumes roughly half the world’s supply of steel, aluminum, copper and other major metals. It is important to follow what happens in China because it not only effects metals but also the world’s economy.

METALS

September rebound might be short lived

Prices on prime aluminum rallied during August along with copper and nickel. By the end of the month, aluminum spiked $ .125 per pound. However, by September 2, it was up $0.7 over the August start. Copper and nickel also increased mid-month and were back to about even by the start of September. Hedge fund activities were given as the reason for the spike on the LME. Eventually reality stepped in, and they came back down. Prime scrap prices also rose $.07 while most of the other scrap prices stayed the same.

Aluminum and copper have been retreating due to concerns about slowing Chinese demand, global economic conditions and the U.S. presidential election.

Goldman, which is generally more bullish than other metal forecasters, has reduced its 2025 copper average by $5000 a metric ton ($2.22/lb.) They had forecasted 2025 copper average at $15,000 a metric ton on LME ($6.80/lb.) and now it is $10,100 ($4.58/lb.) Yikes! What a miss.

In addition, the bank also downgraded its 2025 price prediction for aluminum to $2,540 a ton ($1.15) from $2,850 ($1.29). Most other aluminum forecasts for 2025 range from $1.035 (Harbor) to others at $1.125. Goldman remains bearish on iron ore and nickel and said gold was its preferred near-term hedge against geopolitical and financial risks.

Citi, meanwhile, maintains its three-month price forecasts for copper and aluminum, which is more in line with the other major forecasts. Citi analysts note that the U.S. election and potential new tariffs under a Trump presidency present key risks to a broader economic recovery. Tariffs on foreign goods ultimately increase prices domestically and cause inflation.

CLOSING

Too bad Henny Penny didn’t know about my favorite acronym, VUCA: Volatility, Uncertainty, Complexity and Ambiguity. If she did, she would have known that things are not always what they seem to be and realized that it was just an acorn, not the sky.